The early Model 3s will be horribly negative margin

[Matias]

This is not a bear post, I just want to remind and inform you, that on H2 2017 Model 3 will have a negative impact on Tesla's financial result



Colin Michael Langan - UBS Securities LLC

Oh, great. Elon, in the press release, you give comments on margins for the first half of the year. Any broad color on how we should think about margins in the second half, particularly as the Model 3 launches? I mean will that be profitable day one, or is that going to take some time for that to ramp? Any color there?

Elon Reeve Musk - Tesla, Inc.

(31:05) that it will not be profitable on day one, because of that exponential issue that I mentioned. The early Model 3s will be horribly negative margin, particularly on day one, when I say literally day one. Because you're starting at a tiny, tiny rate, as you spool up this giant machine. So, it's – like, no company on Earth could – it's not a function of Tesla. It is like physically impossible. So, you have to get the production rate to some reasonable capacity percentage of the system.

If the capacity of the production system is X, until you are at least like half X, your gross margin is going to be weak, and it's going to be terrible when you're like an order of magnitude below, or if you're 10% of X, or less. It's going to be terrible. But then it'll get really good as you start to approach 100% capacity. Like, then it gets great. And then, as we get to the initial phase of capacity of 5,000 a week, I would expect to see gross margins comparable to that of the Model S and Model X.

Source
Tesla (TSLA) Q4 2016 Results - Earnings Call Transcript

 

[JRP3]

Margins were negative for the early versions of each car Tesla made, especially the Model X. Not sure why we need "reminding" of something we already knew, or why you felt the need to create a special thread for it. In fact it is a bear post.

 

[tomas]

Duh. Manufacturing cost accounting 101.

 

[dennis]

We should get an indication of the magnitude of the impact on Q3 margins in the Q2 earnings call, likely in early August.

 

[Matias]

Margins were negative for the early versions of each car Tesla made, especially the Model X. Not sure why we need "reminding" of something we already knew, or why you felt the need to create a special thread for it. In fact it is a bear post.

Ok, lets not start a meta-discussion about whether this is a bear post or not (although I started it myself by saying it is not, sorry about that...)

My point was and is, that H22017 M3 will probably not bring money in. If everyone already knew that, sorry about the disturbance!

 

[Visscher]

In other news, late model 3s will have a horribly positive margin.



Not trying to be a bull here, just posting something that I thought you all were not capable of knowing without a little patronizing post.

 

[GoTslaGo]

This is not a bear post, I just want to remind and inform you, that on H2 2017 Model 3 will have a negative impact on Tesla's financial result



Colin Michael Langan - UBS Securities LLC

Oh, great. Elon, in the press release, you give comments on margins for the first half of the year. Any broad color on how we should think about margins in the second half, particularly as the Model 3 launches? I mean will that be profitable day one, or is that going to take some time for that to ramp? Any color there?

Elon Reeve Musk - Tesla, Inc.

(31:05) that it will not be profitable on day one, because of that exponential issue that I mentioned. The early Model 3s will be horribly negative margin, particularly on day one, when I say literally day one. Because you're starting at a tiny, tiny rate, as you spool up this giant machine. So, it's – like, no company on Earth could – it's not a function of Tesla. It is like physically impossible. So, you have to get the production rate to some reasonable capacity percentage of the system.

If the capacity of the production system is X, until you are at least like half X, your gross margin is going to be weak, and it's going to be terrible when you're like an order of magnitude below, or if you're 10% of X, or less. It's going to be terrible. But then it'll get really good as you start to approach 100% capacity. Like, then it gets great. And then, as we get to the initial phase of capacity of 5,000 a week, I would expect to see gross margins comparable to that of the Model S and Model X.

Source
Tesla (TSLA) Q4 2016 Results - Earnings Call Transcript

In other news, late model 3s will have a horribly positive margin.



Not trying to be a bull here, just posting something that I thought you all were not capable of knowing without a little patronizing post.

In defense of OP.

Those of us who are following TSLA closely know this. Those of us who are knowledgeable about owning stocks, or following growing companies understand these details (poor GM [gross margin] early on, much better GM later).

But those who don't know these things or follow TSLA as closely as we do may not. Someone may just get super excited about Model 3 coming out, plop a bunch of their savings into the stock only to see it whipsaw back and forth due to these details. Then drop out at the worst time because they don't know these aspects of accounting rules, growth stocks, etc... Or suddenly see the next quarter balance sheet GM get hurt by the Model 3.

So while the post is bearish leaning (initially), it does and should help educate those who do not understand these things. And understand that an investment in TSLA is a long term proposition. Especially as posters like @Visscher help increase understanding of how the GM [gross margin] cycle will work.

 

[Fallenone]

Actually based on last Sun tweet, all Q3 will deliver no more than 2000 model 3. Say the average GM of these are -20% with ASP of $42k. That's a net loss of $16M, which can be erased by 640 Model S/X at 25% GM and $100k ASP. I wonder if they are intentionally keeping lower delivery of Model 3 in Q3.

 

[GoTslaGo]

Actually based on last Sun tweet, all Q3 will deliver no more than 2000 model 3. Say the average GM of these are -20% with ASP of $42k. That's a net loss of $16M, which can be erased by 640 Model S/X at 25% GM and $100k ASP. I wonder if they are intentionally keeping lower delivery of Model 3 in Q3.

I think they are. Besides the GM, I am sure there are production issues that they want to work out, and/or get on top of when they actually start building and delivering the cars. There will also be a lot of real world customer feedback that will help them tweak the line (IMHO).

 

[neroden]

Actually based on last Sun tweet, all Q3 will deliver no more than 2000 model 3. Say the average GM of these are -20% with ASP of $42k. That's a net loss of $16M, which can be erased by 640 Model S/X at 25% GM and $100k ASP. I wonder if they are intentionally keeping lower delivery of Model 3 in Q3.

Ehhhh... actually the gross margin should look far worse than that for Q3. Depreciation isn't an issue since it's done on a units-of-production basis. What is an issue is salaries and wages. All the people supervising the machines will be paid full time, and yet they'll be producing 1630 cars over 3 months. (Whereas in Q1 2018 the same people will probably be producing over 60,000 in the same time period.) Of course I suspect we've already been seeing those people getting paid during Q2... but it probably wasn't accounted for as "cost of sales" until Q3.

I have no idea how the market will react; I expect lots of "Tesla loses money on every car sold" articles, but on the other hand the sheer buzz from getting Model 3 into people's hands could cause a rally.

 

[Waiting4M3]

Would they be obligated to break out the margin on just ~1600 M3 in Q3? seems a tad meaningless

 

[larmor]

Duh. Manufacturing cost accounting 101.

To add to the above... Derr...

 

[neroden]

(anyway, my conclusion is that we'll see a big hunk of cost move from preproduction expense to cost of sales between q2 and q3, which will make gross margin look 'worse' but won't mean anything)

 

[Fallenone]

Ehhhh... actually the gross margin should look far worse than that for Q3. Depreciation isn't an issue since it's done on a units-of-production basis. What is an issue is salaries and wages. All the people supervising the machines will be paid full time, and yet they'll be producing 1630 cars over 3 months. (Whereas in Q1 2018 the same people will probably be producing over 60,000 in the same time period.) Of course I suspect we've already been seeing those people getting paid during Q2... but it probably wasn't accounted for as "cost of sales" until Q3.

I have no idea how the market will react; I expect lots of "Tesla loses money on every car sold" articles, but on the other hand the sheer buzz from getting Model 3 into people's hands could cause a rally.

OTOH, they have AP to boost GM to counter. Anyway, with the low delivery number, the impact on financial should be small.

 

[bdy0627]

Others on this forum have voiced expectations of solid Q3 and Q4 ER's supporting the share price, so this reminder is helpful. That is far from likely at least from a financial standpoint, though the M3 production numbers given in Q4 ER may provide support. Q1 2018 should get rather interesting.